Reacting to Market Volatility

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How are you feeling about investing nowadays? Do you own stocks that have tanked over 25% in one day? I did. On one occasion I got so worried by the fall in the stock price, that I sold it for a big loss only to see it bounce back a week later. That hurt. However I was glad to find that my reaction to a volatile stock market is line with a lot of investors. My reaction though should have been more thoughtful and I could have avoided an unnecessary loss.

Too often people panic and take drastic measures. Long term investors have to realize that the market is going to have corrections and if they panic when these corrections happen they will lose money. Here are some well known guidelines to consider for these volatile situations, that are worth revisiting:

1. Take a step back, look at the big picture and then make your decision. In the bigger scheme of things, the recent fall in markets may be a 1-3 month blip and could be an excellent entry point into the market.

2. Have some cash saved up in case a great buying opportunity comes up. In a volatile market you are going to see a lot of good stocks get taken down and this is when you can make a lot of good money. Some of the blue chips look very cheap on a valuation basis. If you are not sure which blue chip to buy, get an ETF (exchange trading fund).

3. A lot of people are in the same boat as you. Remember the story of the turtle and hare. Slow and steady wins the race. If none of the fundamentals of the stocks you own have changed drastically, then don’t panic sell during periods of high market volatility.

4. If you are loosing sleep then do sell some stocks and take some profits of the table. A buck in hand is worth more than a buck in paper profits.

Do you have any others to suggest?

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1 Comment on "Reacting to Market Volatility"

[…] growth and sovereign debt fears. I wrote a couple of posts back in ’08 on reacting to market volatility and it is eerily applicable to what we are going through today. The US debt ceiling debate seems […]


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